Currencies Back on the Rally Tracks Against the US Dollar

I see where the euro (EUR) – which, a week ago, was looking pretty sickly – is back on the rally tracks… Or should I say, that the dollar is back on the slippery slope, which allows the euro (the offset currency to the dollar) the ability to rise in value versus the dollar when it slides… Yes, of course I should! But, I like saying something is on the “rally tracks”! Speaking of rally tracks… The Chinese renminbi (CNY) took a giant leap forward last night, with the biggest overnight move in three weeks!

This guy, the Governor at the People’s Bank of China, Zhou, always has a zinger or a very astute vision of the markets, and last night was no exception… Zhou said that “inflation was high” (in China), and that China needs to strike a balance between economic growth and consumer prices.” Yes, Mr. Zhou, that’s exactly what you should be focused on… But, if you want to go the route of your friends over in Singapore, you could simply allow large moves in the renminbi on a consistent basis… Because, as we all know, a strong currency goes a long way toward combating inflation…

I also see the Aussie dollar (AUD) back on the rally tracks. After falling from $1.09 to $1.05, it has fought back to gain some lost ground, and is pushing the envelope to $1.07 again… I would have to think that the high yielders, and commodity currencies would be stronger today after yesterday’s strong showing in the IPO of LinkedIn… That should light up the stock jockey’s eyes, eh? Yes, these markets are still connected for some unknown reason… Historically, they do not move together, but ever since the financial meltdown of three years ago, they have been, save a few times when it looked as though the disconnect had set in, but only to have been a false dawn.

Like I’ve said quite a few times recently… I have the bejeebers scared out of me right now, with what’s going to happen to the financial markets when the Fed steps away from the stimulus table next month… And from the looks of it, and the words of Ben Bernanke himself, quantitative easing helped the stock markets to their gains. So, with that in mind, what’s going to happen when quantitative easing ceases? If stocks are going to hit the headwinds once QE is removed, it would be better for the currencies and commodities to get that disconnect in place now!

Well… Last night, Norway’s central bank (Norges Bank), Gov. Olsen, made a very strong comment about interest rates that have the Norwegian krone (NOK) hopped up this morning. Olsen said that “normal rates are around double the current 2.25%.” He went on to express little concern about the strength of the krone, and that’s just what a currency trader is looking for… He wants to know that he’s not going to get caught with his hands in the cookie jar, should the government decide to intervene…

The Canadian dollar/loonie (CAD) has been quite resilient through this recent US dollar strength. Yes, the drop in the price of oil started all this unwinding, but as I said before I left… Oil may have fallen, but still remains close to $100, and $100 oil is not good for the US economy. But, it is good for the loonie! Yesterday, Bank of Canada Governor Carney said that he just doesn’t see the need to signal policy intentions ahead of schedule, but that “higher rates are built into the Bank of Canada’s forecast, and the markets should converge on that.”

Folks… That’s central bank parlance for interest rates are going to go higher, but I’m not going to give you any hints about when this will happen… The key here is that we could very well see interest rates going higher in Canada… I’m not sure, I’d have to go back and check, but I recall saying that I thought the Bank of Canada would hike again in June… And if I didn’t, then I have now!

Getting back to China for a moment here… I did my “Change in Currency Regime” presentation 3 times in the past 2 weeks, so… I’ve got it fresh on my mind… And one of the points I make in the presentation is the point that I first made here in the Pfennig, months ago… And that is that China was buying truckloads of gold and silver for two reasons… 1. To diversify out of the dollar… And 2. (And this is my thought…) So that they can eventually align their currency to these two metals, when they decide to allow the renminbi to float… Think about that for a minute, folks… If China has the largest population, the largest treasure chest, and have financed both the US and Europe, and then they tie their currency to gold and silver (even if it’s just a percentage tie) one would think that their currency would be the most sought after in the world… And when that happens, another notch gets placed in the Chinese belt that wraps around the reserve currency of the world…

Speaking of China… There was a great story in Reuters about Chinese domestic demand for gold continuing to be very strong… “Private gold demand in China set a quarterly record with the arrival of Lunar New Year. In the first quarter, private gold demand was 0.71% of China’s gross domestic product, compared with 0.47% of GDP in the comparable quarter last year.”

Well… The economic data here in the US continues to be a mixed bag of nuts… Just this week we’ve seen Housing Starts fall 10.6%, Industrial Production print flat, and Capacity Utilization slip some. The Weekly Initial Jobless Claims fell (that’s good!), but remain above 400,000 per week (that’s bad!). Today, we’ll see the color of Existing Home Sales, Leading Indicators (I expect to be weak), the Philly Fed (manufacturing, again I think will be weak) and something new called, The Bloomberg Consumer Comfort Index and Economic Expectations… Both Comfort and Expectations are forecast to be weak…

Do you see a trend starting here? Weak this, weak that, and pretty soon, the economy is backpedaling again… That’s my thought for the economy going forward, but really getting the stuffing knocked out of it the further we pull away from the quantitative easing station… So, by September or October, we’ll be hearing whispering campaigns beginning once again about another round of QE… Shoot Rudy, just yesterday, Fed Head, Dudley, made overtures about QE3… So… That just gives me more terra firma to stand on, with my thought that QE3 comes later this year, not right after June. And eventually we see QE4, QE5, 6,7.8, 15, 25… The economy has become too addicted to this stimulus… And instead of making the economy go “cold turkey”, the Fed will be like the pusher, always feeding us more stimulus…

Then there was this… Well… Here we are… May is about to begin winding down, it’s still not “spring-like weather” here, and the depression that began three years ago remains in place… “What?” I hear you asking… Come on Chuck, the NBER said the recession was over a couple of years ago, and yet you still call this a depression? Ahhh… Grasshopper, yes, of course I do… Unemployment is still around 23%… Home prices keep falling… The government keeps trying to “help out” with stimulus, and we keep sending out checks to people that don’t have jobs… No, it’s not a soup line like we saw pictures of from the “great depression”, but those people didn’t get “the checks” sent to them in the mail from the government… Yes, think about this long and hard… Instead of soup lines, we save people the embarrassment of having to stand in a line… Instead, we mail them a check, two checks, maybe three or four, each month… What incentive do they have to correct this? 45 million people receive food stamps now, folks… If you figure there are about 300 million people in the US, then almost 1/4 of the population gets to eat for free on the taxpayers… And this is not a depression?

To recap… The currencies and metals are trying to heal some from the recent selloffs… Although, now that I’ve come to the end of the Pfennig, the currencies and metals are selling off a bit from the levels I saw when I first came in! The data here in the US has been weak lately and I don’t expect that to change. We saw comments from the Governors of both the Norges Bank and Bank of Canada, with the same underlying theme… that interest rates were going higher, and they weren’t worried about the strength of each respective currency.

Chuck Butler is President of EverBank® World Markets and the author of the popular Daily Pfennig newsletter.

With a career in investment services and currencies extending over 35 years, Mr. Butler oversees all aspects of customer service and the trading desk for EverBank World Markets. A respected analyst of the currency market, Mr. Butler has frequently made appearances or been quoted by the national media. These include the Wall Street Journal, US News, World Report, MarketWatch, USAToday, CNNfn, Bloomberg TV, CNBC, and the Chicago Tribune.

Mr. Butler was previously the Chief International Bond Trader and
Director of Risk Management for Mark Twain Bank, and has held significant positions in the investment industry since 1973.